• The Mexican Peso is trading lower in key pairs on risk aversion from the escalating Middle East conflict.
• Carry-trade outflows on the back of a strengthening Yen are further headwinds.
• Technically, USD/MXN pulls back within a rising channel. 

The Mexican Peso (MXN) is trading about half a percent lower in its most-traded pairs on Monday morning as traders arrive at their desks after the weekend break. 

Fears of an escalation in the Middle East after a bloody exchange between Israel and Hezbollah is weighing on riskier assets, including the MXN, and the continued appreciation of the Japanese Yen (JPY) suggests more outflows from the carry-trade, of which the Peso has been a key beneficiary. 

Mexican Peso benefits from Fed Powell’s Jackson Hole speech

The Mexican Peso experienced a temporary recovery on Friday, triggered by a speech from the Chairman of the Federal Reserve (Fed) Jerome Powell at the Jackson Hole banking symposium, in which he confirmed the Fed would be cutting interest rates. Powell said a noted slowdown in the US labor market was a key reason to lower borrowing costs. 

“The timing and pace of rate cuts will depend on incoming data,” said Powell, adding, "upside risks to inflation have diminished, downside risks to employment have increased." 

His comments sent the US Dollar (USD) lower in its pairs since the expectation of lower interest rates is negative for a currency as it usually results in a fall in foreign capital inflows. USD/MXN ended the day down over two percent. EUR/MXN and GBP/MXN also fell, but to a lesser degree.  

After Powell’s speech other Fed officials chimed in with similar opinions. Chicago Fed President Austan Goolsbee said attention needed to be given to the cooling job market since inflation was now on its way sustainably lower, in an interview with Bloomberg News. Philadelphia Fed’s Patrick Harker said the Fed needed to be methodical in its approach to reducing interest rates, cautioning, perhaps, against any large step-decreases in interest rates